The Week in Muniland

The municipal market generated modestly negative returns last week as the wave of supply continued to hit the market. Two-, 10- and 30-year yields rose 1, 4 and 2 basis points (bps), respectively. The Bloomberg Municipal Bond Index (Index) returned –0.12% last week, bringing year-to-date returns to 1.62%.

• Why it matters: The municipal market also modestly underperformed US Treasuries, with after-tax spreads widening 6 to 10 bps across the curve, as the market lagged the sharp rally in Treasuries on Thursday. In addition, the market was grappling with a somewhat heavy calendar. Market technicals continue to be the primary driver of relative performance, with elevated issuance weighing on the market despite steady inflows that helped absorb a portion of the calendar. Investors added $625 million last week, according to Lipper. While last week’s inflows were modest compared to recent weeks, they have still been supportive to the market. May’s inflows were the highest May print on record and seventh-highest month on record. Relative valuations improved across the curve last week, as shown in Display 2, but still look expensive on the front end of the curve−particularly for investors in high-tax bracket states. This week’s calendar takes a (relative) breather given the shortened week, with ~$9 billion expected to price.
  
  

US May CPI was in line with expectations, with headline inflation up 4.2% year over year and core inflation up 2.9% year over year.

• Why it matters: With headline inflation having climbed 1.8 percentage points since the onset of the conflict in Iran, the energy-driven surge has dominated the near-term inflation picture. Gasoline prices have retreated so far this month, and we believe that the headline measure is likely at or near its near-term peak. The more consequential question is whether elevated energy costs continue to pass through core prices, which, at 2.9% year over year, remain well above the Fed’s target and continue to move in the wrong direction. While it is clear that energy prices are the near-term driver in inflation, broader measures are also not consistent with the Fed’s target. Services inflation has inflected higher this year, and while goods prices have largely stabilized following last year’s tariff-induced increase, the balance between the two still leaves core CPI uncomfortably elevated. This means the Fed will almost certainly leave rates unchanged in its meeting this month, and the prospect of near-term rate cuts are very diminished. That said, while the odds of a rate hike over the coming months are increasing, our base case is for no change in rates. This week’s updated dot plot will provide more insight into the FOMC’s thinking and Chair Kevin Warsh’s first press conference will give us a window into his perspective.
  
  

Despite a moderating revenue environment, municipal credit quality remains strong, as highlighted in the National Association of State Budget Officers’ Spring 2026 Fiscal Survey.

• Why it matters: This report highlights a transition—not a deterioration—in state credit conditions. Budget management has become more active as the post-pandemic revenue surge fades. Revenue growth is still positive, but has moderated, which has prompted states to take measured actions such as targeted spending cuts, hiring restraints and other selective revenue changes to preserve their structural balance. While some states are utilizing portions of their historically high rainy-day funds, these reserves remain well above pre-pandemic historical levels and continue to provide a meaningful cushion against future economic volatility. In our view, this combination of budget adjustments and still-robust reserve positions supports the stability of state credit fundamentals. While fiscal conditions are normalizing, the sector continues to remain well positioned to navigate a more moderate revenue backdrop without undermining overall credit quality.